Single Options Trade vs. Overall Portfolio?

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In this video, I want to talk about managing trades and this concept of managing either a single trade by itself or the overall portfolio or really, what should we be looking at when we start to think about managing or hedging trades that are going against us.

Often, I’ll get questions from members and got a lot of questions today which prompts me to do this video and this tutorial. But I’ll get questions from members about managing or adjusting trades that are paper losers right now.

Specifically, we recently had our MON (That’s not Monday. It’s the actual ticker symbol for the stock.) iron butterfly that’s moved against us and has created a paper loss of about $600 right now.

However, with the broad markets down more than 1.5 points today, our overall portfolio is actually up $500. Yes, this, of course, includes MON and the paper loss that we have currently with MON and other positions that we have on.

Overall, even though we’re down in MON, we’re down in that particular stock, we’re up on the overall portfolio. The question becomes, “What do we do? Do we manage the single trade or do we manage the overall portfolio?”

Here is a quick look at MON. Just so you can see today, the stock has just made a considerable move lower. Most of the trading that we've done in MON is centered around the 100 strike.

We ideally wanted to see MON around 100, and you can see it’s moved considerably down from that. Implied volatility hasn't been our friend at all, and neither has the direction of the overall stock.

When I look at our overall profit and loss today, you can see on this MON trade we’re down about $621, but on the overall portfolio, we’re up today, and we actually have a little bit of a bearish tilt in our portfolio which is why we’re making money on everything today and over the last couple of days.

We’ve taken off a lot of profits because we have this overall bearish tilt in our portfolio. Here's a look at the payoff diagram for MON. You can see it’s a very wide iron butterfly. Everything in this stock is centered around 100. That's where the strategy peaks here.

That’s where we make our most money. The stock now trading at about 86.25 is much, much less than where we want it to be. But here's the thing. When I look at trades like this, even though I’m concerned about this trade…

Don’t get me wrong. I don’t want to lose money on any of the trades. But I'm more concerned about the overall portfolio.

Right now, this trade is, even though we’re losing money on it, this trade has some bullish exposure because if MON goes higher or if the broad markets go higher, then we actually can have money coming back into the portfolio, less of a loss and potentially make money on MON.

We’ve gone over this in other video tutorials. What I do is I always go ahead and Beta weight everything to SPY and members who area a part of our pro or elite program know that we Beta weight everything we do to SPY.

All you have to do if you’re using Thinkorswim is go inside here, type in SPY. You want to change this category to Beta weight or portfolio Beta weight, and then, of course, you want to hide any simulated trades.

These are all real, active and open trades that we have. You can see our portfolio is balanced, but it's a little bit bearish and tilt. That's by design because we want it to be bearish heading into this week, following last week what happened with the FED and we want to see the overall market or SPY head lower.

That will give us the optimum exposure in the market. You can see SPY is trading right about here. If the S&P stays here or goes lower, we tend to make a little bit more money with a bearish move.

Now that we have context on both the individual trade and the overall portfolio, I opt to say we’re not going to adjust or manage MON at this exact moment. The reason is that MON is giving us a lot of exposure on the bullish side of our overall portfolio.

Even though it might be a loser right now, we have many, many more positions that are overshadowing this MON trade right now and are making much, much more money than we're losing on MON.

If the market does move higher, then MON is going to be one of those trades that happens to make money or lose less money, whatever the case is. It’s going to start making some of that paper loss back, and it’s going to help give us a little bit more balance.

If I were to take off MON, you’d probably see this portfolio chart be a little bit more bearish in nature because now we’re taking off a trade that gives us some bullish exposure. The overall theme here is we want to make sure that we manage obviously the individual trades, but it's more important to manage the overall portfolio.

I’d be much more concerned about a trade if we had a bearish trade and the market was moving higher against us. We could give ourselves a little bit more exposure by adjusting into a bullish trade.

But right now, our overall portfolio is pretty balanced, and like I just showed you, we’re making money even on the day right here. We’re up about $528 even with that paper loss on MON.